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Legal Battle Lifts Profile of a Quiet Empire

111 East Wacker Drive in Chicago, one of the properties that are part of CommonWealth REIT, a $25 billion real estate empire based outside Boston.Credit
Nathan Weber for The New York Times

It is a quiet American fortune, a $25 billion empire stretching from Boston to Honolulu that is rarely noticed outside tight business circles.

But now the private world of Barry Portnoy, the anti-Trump of American real estate, is being dragged into an uncomfortable spotlight in a drawn-out legal battle for part of his empire.

Mr. Portnoy, 67, oversees a wildly lucrative business from unassuming offices in Newton, Mass., west of downtown Boston. In an industry known for big money and bigger egos, he cuts a decidedly unglamorous figure. Mr. Portnoy runs his empire on a shoestring and, by most accounts, is far more interested in making money than spending it. For a time, he commuted to work in a Subaru, according to several former employees, and he keeps a low profile even at events like the annual company clambake in the parking lot.

His son and business partner, Adam Portnoy, lives a bit larger. Adam Portnoy’s wife, Elika, was a runner-up in a Miss Bulgaria beauty contest. Said to be an expert marksman, she played a belly dancer in the 2012 Christian Slater thriller “Assassin’s Bullet.” Adam Portnoy owns a 43-foot yacht called the Mutressa, a Bulgarian term that loosely translates as “gangster’s mistress.” The couple met while working at the World Bank.

What unites father and son, the former employees say, is an abiding love for a hard-nosed deal. In their Newton offices hangs a painting of Wild West bank robbers wearing ill-fitting business suits. It is titled “The Fort Worth Five a k a The Board of Directors.”

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The Triangle Plaza East Tower, near O’Hare International Airport in Chicago.Credit
Nathan Weber for The New York Times

For years, some investors have grumbled that the Portnoys have enriched themselves at investors’ expense, a claim the Portnoys have dismissed as nonsense.

But now some serious financial players are vying for a multibillion-dollar piece of their kingdom, in a legal battle over an obscure real estate investment trust called CommonWealth REIT. On one side are the Portnoys, who have long blurred the lines between their public companies and their private fiefs. On the other is a cohort of New York money men, among them a protégé of Carl C. Icahn, the quintessential Wall Street gadfly, and associates of Stephen Ross, the Manhattan real estate magnate. Both sides are hurling an accusation often heard when money collides with money: each accuses the other of baldface greed.

Whatever the outcome, the imbroglio has trained attention on a web of trusts and partnerships that the Portnoys have long used to pull many millions from CommonWealth and other public entities that own city towers and suburban office complexes across the nation. Last year, their private management company collected nearly $200 million in various fees and expenses from those businesses. The Portnoy camp says that the dissidents are essentially trying to steal CommonWealth and that courts have repeatedly sided with the Portnoys. In late June, the Portnoys and the rest of the board were voted out, but the Portnoys contend that the vote was invalid and was swayed by their opponents’ hedge fund friends. Starting this week, the dispute will go before an industry arbitration panel.

A crucial issue is the Portnoys’ management arrangement with the funds they oversee. Essentially, they make money through numerous fees they charge no matter how CommonWealth’s share price performs in the stock market, leading one research firm, Green Street Advisors, to brand the Portnoy funds “uninvestible.”

Over the last decade, CommonWealth has returned about 45 percent. That performance might sounds great, but it lagged the broad stock market and an index of other real estate investment trusts during that period. Real estate investment trusts, a popular investment strategy, pay no corporate income tax as long as they distribute 90 percent of their profits as dividends to investors.

Adam Portnoy, 43, staunchly defends the Portnoy way. He says the family has rewarded investors over the years and points out that CommonWealth found ready buyers for new shares that it sold this spring.

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The Herald Square building on H Street in Washington.Credit
Drew Angerer for The New York Times

“If we hadn’t, how would we be able to raise money so readily?” Mr. Portnoy said in a telephone interview. “Why are shareholders investing in our companies?”

Barry Portnoy got into real estate in 1986. While a lawyer at the Boston firm of Sullivan & Worcester, he established a real estate investment trust that was initially involved in health care centers.

Former employees, including several who worked closely with the Portnoys, say Barry Portnoy spends long hours poring over numbers, and they characterize him as demanding boss who can be unforgiving at regular Tuesday night strategy meetings. When Adam Portnoy joined the family firm in 2003, after starting an Internet service provider that eventually merged with another service provider, father and son continued to expand their reach into hotels, retirement homes and buildings leased to the government.

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As they built their empire, small, dissident investors argued that some of their acquisitions appeared to benefit the Portnoys more than the shareholders. But now bigger, more powerful adversaries have arrived.

Jeff T. Blau, the chief executive of Related Companies, the real estate giant founded by Mr. Ross, is one of the New Yorkers now battling the Portnoys.

“Maybe if we had known they’d go to such extremes to thwart the will of shareholders, we would have thought twice about doing this,” Mr. Blau said during an interview in his office overlooking Columbus Circle in Midtown Manhattan. The activist role against the Portnoys has pushed Related into new and uncomfortable territory.

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The British School of Washington, on Wisconsin Avenue in Washington.Credit
Drew Angerer for The New York Times

Mr. Blau and Keith Meister, a former top lieutenant of Mr. Icahn who now runs his own hedge fund, invested heavily in CommonWealth earlier this year. The two said they believed the stock was undervalued, contending that, with some improvements, the buildings could draw higher rents. In late February, Related and Mr. Meister’s firm, Corvex Capital, disclosed that they together controlled 9.8 percent of CommonWealth.

The Portnoys promptly began a vigorous defense.

Eventually the dissidents sought support from heavyweight investors like Richard Perry, a prominent New York hedge fund manager. They also started making multiple offers to buy CommonWealth at above-market prices, but the fund’s trustees decided against a sale, calling the offers “illusory,” unfinanced, and an attempt to “seize control.” “There was no offer,” Adam Portnoy said. “They wrote on a piece of paper that they might, on a very conditional basis, maybe they would pay a certain price. That’s not an offer.”

In late June, Corvex and Related announced that 70 percent of CommonWealth shareholders had voted to remove the entire board. The Portnoys said that the vote did not follow rules and that it was influenced by a group of shareholders — hedge fund pals of Corvex and Related — who have since sold their stake. It now falls to an arbitration panel to decide.

“In all of my experience, I’ve never seen a management team react with such disregard for corporate value and such personal self-interest as a motivation,” said Mr. Meister of Corvex.

But the Portnoys say they are on the side of everyday shareholders.

“Everything we’ve always done has been in the best interest of shareholders,” Adam Portnoy said. “When we come in to work every day, our focus is on the common shareholders and executing on the business plan. And it’s starting to work. But it needs a little more time to come to fruition.”

A version of this article appears in print on July 24, 2013, on Page B1 of the New York edition with the headline: Legal Battle Lifts Profile Of a Quiet Empire. Order Reprints|Today's Paper|Subscribe